by Matthew Perry
(last updated February 21, 2009)
If you've ever played Monopoly, bankruptcy may equate with the end of everything: you lose. In real life, bankruptcy isn't half as scary. In fact, it's a useful tool for getting relief from overwhelming debt. However, you aren't bankrupt just because they have no money (thanks for another misconception, Monopoly); the general rule is that you're bankrupt when you have more debt than you can reasonably expect to pay off in five to seven years (not including long-term debts such as mortgages).
If bankruptcy sounds like a good option for you, you have a couple of options concerning the type of bankruptcy you want to file for. Once you've declared bankruptcy, your assets are frozen—meaning that you can't touch them—by the court. You're virtually saying "I can't handle this anymore—you do whatever you think is best!" Once you've filed for bankruptcy, though, you'll find immediate relief from pestering creditors since by law they have to leave you alone as long as the bankruptcy process is in motion.
Anyone can file for bankruptcy at any time, but filing for bankruptcy doesn't mean you'll have your debts discharged. After filing, you'll have to have your finances examined to make sure you cannot pay your debts on your own; if the examiner decides that you can feasibly take care of your own debt, that's what you'll have to do. I mean, think about it. It would be silly to let just anyone declare themselves bankrupt—no one would ever pay their debts!
Well, perhaps that's not quite accurate. There are a lot of downsides to bankruptcy that keep people who don't really need bankruptcy from filing. First of all, filing for bankruptcy—either title VII or title XIII—requires a fee of several hundred dollars, which can be paid in monthly installments. Then, there's what bankruptcy does to your credit history; if you can get loans or credit cards at all, you won't be able to get decent interest rates until your bankruptcy is at least ten years in the past. Even if you're willing to take a red flag on your credit and pay the application fee, the process of filing itself is so confusing that most people find it necessary to hire an attorney to help them out.
Once your application has been approved, your finances will be evaluated again, this time by a court-appointed trustee. The trustee is not your friend! He acts as an agent for the creditor, looking to give them as much as he can. He'll look back through your records for two years, looking for things that can be undone, as well as selling what he can. However, he usually comes up empty-handed because those who are in desperate enough condition to file for bankruptcy don't have much left that isn't protected from seizure by law.
Finally, there is a meeting with your creditors! On the bright side, this meeting is generally your only visit to the courthouse. You are sworn in and questioned by the trustee. Don't get too nervous, though, because creditors rarely show up and the meetings are usually very short. This will usually be the individual's only required trip to the courthouse.
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